It's been said that "one man's trash is another man's treasure." HBS Assistant Professor Deishin Lee, however, has taken that old adage a step further in her recent working paper Turning Waste into By-Product by showing how it's possible for companies to turn their trash into their own treasure.

The concept of by-product synergy (BPS) consists of taking the waste stream from one production process and using it to make a new product. The concept is hardly new—in agriculture, cast-off corn husks are converted to animal feed, and discarded cow parts are turned into everything from leather to jet engine lubricant.

“You need to ask what are your resources, and how can we organize to maximize the value we create?”

But Lee's research extends the concept into industrial processes, using an analytical model to show that a modern manufacturing plant can use BPS to make any number of new products in order to both reduce environmental impact and increase profits.

"Every manufacturing process creates something—a car, paint, chairs—but in addition, other outputs are collaterately generated," says Lee. "The default disposition of these outputs has been some form of waste disposal, but we need to change that mindset."

In the simplest analysis, productively using waste instead of trashing it can cut costs by reducing disposal fees. Some companies have taken that a step further by opening up additional revenue streams through by-product sales. But according to Lee, the greatest returns are realized when a company widens its scope to think strategically to consider it as a joint production process.

"You have to stop thinking of yourself as a company that creates a certain product and instead think about the resources you have (including raw material resources) and how you can use them to produce as much value as possible," says Lee. In some cases, that might mean, paradoxically, creating more waste, not less, in order to maximize profit.

Making A By-product Strategy

Lee explains she originally backed into the concept of BPS. Her past research focused on environmental sustainability, examining how companies could minimize their impact on the environment. Thinking that a recycling firm would be the most logical place to start, she contacted Gordon Forward, CEO of Chaparral Steel, a Texas firm using recycled steel to make new products. But when she contacted him, he was extremely excited about the notion of by-product synergy, something he experienced first-hand in a partnership with cement manufacturer Texas Industries to use the steel slag waste stream to make Portland cement. "He said he challenged his organization to think not as a steel company or a cement company, but as a company that had resources and capabilities and asked, 'What could we do with that?'"

Intrigued by the concept, Lee began researching the possibilities. She developed a model with three scenarios based on the relative value of the original product, the by-product, cost of waste disposal, and cost of raw materials. In the first scenario, where the by-product is of low value, a company might maximize profit by only turning some of the waste into a new by-product, while still disposing of some of it through traditional means. In the second scenario, as the value of the by-product increases, it might make more sense to actually increase the production of your primary product in order to increase more "waste." In that case, even though profits might fall for your primary product as the market becomes saturated, the increased profits from the secondary product would more than compensate for the loss.

In addition, the production of more waste might have other beneficial consequences as well. One case study Lee examined is a manufacturer called Cook Composites and Polymers Co., which produces gel coats for high-end yachts. One of the wastes produced in the manufacturing process is styrene, a chemical used to clean molds between batches, which can also be used to make coating for concrete. Productively using the styrene waste stream gave the company more degrees of freedom to optimize the now joint production process, creating a win-win situation.

Using the waste stream to make new products doesn't always create such serendipitous scenarios. A classic example, says Lee, are chicken wings. Years ago, wings were thought of as waste, processed into any manner of lesser quality chicken products. When buffalo wings began appearing at every football game tailgate party, however, wings suddenly became a hot commodity. Since BPS implies a proportional quantity relationship between products, it becomes more complicated to manage production. Should the demand for breast meat be driving the production of chicken, or should it be the wings?

The third scenario Lee considered is where the by-product becomes more profitable than the original product. In that case, an industrial manufacturer might deal with the problem by sourcing virgin material to create more of the secondary product. Not only does the company reduce costs for the original product by cutting down on waste, but it also gains competitive advantage over other companies for the secondary product that are limited to sourcing virgin material.

More Emissions Possible

Ironically, increasing production in this way doesn't always have a net positive effect on the environment; in fact, it can lead to even more production of emissions through increased production of the by-product.

"As you create more value and demand for your by-product, and you increase the quantity of everything, then emissions might increase, depending on process characteristics. That could be the unfortunate part of being successful," says Lee. On the other hand, it's hard to quantify the net effect of the entire joint manufacturing process on the environment, as BPS may change the nature of the environmental impact. After all, she asks, "Is it better to have carbon in the air or toxic waste in landfill?"

Then there's the fact that increasing production could come mostly at the expense of competitors, leading to a net zero effect on industry emissions overall—and in some cases, using the waste for by-product production may decrease emissions over using virgin material. Take Chaparral Steel, where Forward estimated the company cut carbon emissions by 10 percent and decreased energy usage by 10 to 15 percent in the concrete production process because the steel slag had already been treated in a way that is value-added for cement production.

In order to take advantage of those kinds of savings and the potential profits of by-product synergy, a company must broaden its focus beyond a market-driven managerial approach that only takes it cues from what customers want, and also look at what the company is well-positioned to produce.

"If you look at everything as market-driven, it's very unlikely you'll get to operational synergies that fully leverage natural resources and capabilities within the firm," says Lee. "You need to ask what are your resources (raw material, labor, and capital), and how can we organize to maximize the value we create? Merging this with the market perspective can then be very powerful. "

And if your trash turns out to be someone else's treasure, well, then so much the better.

In the world of waste to energy, and creating other useful by- products. A transformational science plasma gasification, follows your model. The science replaces Landfills as we know them today and creates virtual landfills, which eliminates toxins from contaminating our planet. One of the main By-product is singas, which is a methanol based product. a great way to change the world. Your paper and study are on point.

Barry Schaffer

Tim Gieseke

President, Ag Resource Strategies, LLC

I call it "ecologizing" the economy. Not in the sense that it is good for the environment (that is just a by-product), but ecologizing in the sense that the billions-year old natural economic system has figured out that there is no waste, just resources and that species utilize these resources to expand their niche. Our economic system is quite cumbersome and future generations will look at it as a folly and embarrassing part of their culture. EcoCommerce (www.ecocommerce101.com) adds an ecological dimension to the economy and begins the process of ecologizing.
Thanks for the article -very inspiring.
Tim Gieseke

JTG

NA

I was intrigued by the topic and was looking for new insights into the subject. I do have to say that I am disappointed. I worked in the petrochemicals industry and the concept of using by-products productively is crucial to competitiveness. The likes of XOM and BASF are shining examples of productively utilising all their hydrocarbon streams within their complexes. There are also steel mills extracting aromatics from their coking byproducts. In fact, it is not just industrial waste products that can be productively and profitably exploited. The waste energy stream of different pressure steam can also be productively utilised. I can go on...

The challenge with productively using waste is not about understanding the alternative use of some of these waste but how to economically convert them is the challenge. If the entire chain sits within the same complex, by-products and lower energy steam can be easily transferred to the downstream units or to units requiring the lower energy steam. If there are not, transportation of these may be impossible or too expensive. Also, if the company does not manufacture products with the by-product streams, they will have to collaborate with another organisation. Different markets with different dynamics, the challenge then become how to find the right partner at the right time.

Finally, the concept of turning waste into treasure is not that new, this article also does not shed anything new.

Patrick Omitoki

Financial Accountant, ABN Nigeria Ltd

This is a great research work. Its an eye opener for managers of resources in any organization. If the research can be taken further with specific business ideas it would assits potential investors, managers of resources at various levels to think strategically particularly areas of increasing the botton line through various sources of revenues in other to enhance the returns on investment (ROI).

Henk Saaltink

Reducing waste profitably and finding new uses for waste considering it as a valuable natural resource is one of the significant elements of "Natural Capitalism" , described in the book of Paul Hawkin, Amory Lovins, and L.Hunter Lovins.
It is part of an Industrial Revolution attempting to restore the balance between consumption and the ability of the environment to supply natural resources.

Ed Reid

By-product synergy is a great alternative to wasteful practices such as landfilling, incineration, pyrolysis, etc., which abet inefficiency and heavy resource use (and environmental degradation).

The use of the waste from one process as an input for another is definitely challenging in terms of having the availability of the "waste" be known to those who could use it and that requires more examination of supply chains and cooperation.

Andy Nobl

President, PROMANDINA S.A.C.

It would be most useful if there were some sort of reference guide where one could find the industries that "produce" a lot of "valuable" waste. I am a professor at a business college in Lima, Peru and would love to get involved in a project of this nature.

Perhaps the easiest way to sort out main products and "waste" would be an alphabetical listing, and from there the interested parties could contact the technology provider, ... who, of course, would alos participate in the eventual profits. (This might not be a big deal, but if this could be done world-wide, it would be a great contribution to human well-being.

Anonymous

This is really wonderful information. Because the waste is a primary problem for developing countries, we need 2 to 3 people like professor Lee for each developing country to help them solve these problems and boost small-scale industry (SSI).

Also, this is actually good back-up business for any new business, and at the same time, it is good ECO for polluted environmental systems--killing two birds with one stone.

Gail Baugh

president, PeopleWear SF

As president of the local apparel manufacturing trade association, one of our goals is to focus on waste of other industries that can become the raw material of a new apparel manufacturing sector.
We found the the EPA's waste stream characterization (analysis of what is landfilled) extremely helpful to identify industries that discarded what the apparel industry could use for manufacturing new textile products.
Using cleaner technology for manufacturing and a dedication to "zero waste" are the future goals for our focus.

Thomas R. Casten

Chairman, Recycled Energy Development LLC

Manufacturing and electric generation emit waste energy streams that could be recycled into useful thermal and electric energy. The U.S. electric system has vented 2/3's of the fuel's energy as waste since 1960, but capturing and using this energy requires a paradigm shift to distributed generation, with electricity generated at or near thermal users including manufacturing, hospitals, commercial complexes, college campuses and district heating systems. (Thermal energy can only be economcially transmitted 3 to 5 miles)

The key question is not whether this waste heat can be profitably recycled, but why utilitiy regulators and policy makers fail to encourage/reward utilities and independent power producers for making the paradigm shift to doubly efficient combined heat and power production.

Countries like Denmark made the policy shift and now generate over half of their fossil fueled power in combined heat and power plants, and in the process, produce a dollar of gross domestic product with 20% less energy than the U.S.

Policy encouragement of net efficiency and reward for recycling waste heat from power generation could stimulate $500 billion of U.S. investment in modern power plants, cut U.S. power costs by over $100 billion per year, and slash U.S. carbon dioxide emissions by 20% as a bonus.

Dr. P.K. Mozumdar.

Management Consultant, P.M. Consultant & Associates

No doubt this is a great piece of research work. The path breaking ideas could be eye opener for researchers in the field of industrial and environmental research. For entrepreneurs they could be sources of exploring new ventures.

Kapil Kumar Sopory

Company Secretary, SMEC(India) Private Limited

Manufacturing waste is indeed not really a waste and most of it can be recycled. This is in the interests of environment protection as the waste otherwise being left around or flown to rivers,etc. is a heath hazard. We have umpteen examples of innovators who even designed products using the waste. Money saving as well as alternate use this is being put to.
We must also research on the ways of waste disposal where this is the last resort. Cost factor is important.

Anonymous

Excellent Strategy, should be implemented particularly when the " resource time " is the waste in the process/ project.

hemant

student ,mba,operation, university of pune,india

Excellent article. It helps to reduce all 7 types of waste in manufacturing. It really adds value in the arena of production.

jannen

student

this is what our school had taught us. as an industrial Engineering student, we should not just focus on the manufacturing situation of a company to be able to be improved but it is also our duty and responsibility to be able to minimize the wastes that a company is producing everyday. i'am happy that we are now focusing on green manufacturing and to know that a lot of companies are converting their wastes materials to new products.
it is then part of our curriculum to be able to know the number of wastes produced and the number of the demand if the product will then be produced. we have a lot of recycled products in our school that you might find of interest.

Anonymous

I know that DuPont did something similar with its paints and other productd by-products. They created new products, reduced waste and started a whole new program on reducing waste throughout their company.